As Toyota tips, VW steers for the top

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Volkswagen wants to be the world's largest automaker, toppling Toyota from its perch. To get there, it has to leap one large hurdle: the sluggish U.S. market.

Updated at 5:30 PM PDT on Tuesday, Oct 20, 2009

It may be one of the world’s most unlikely theme parks, yet each year close to 2 million people pore through Autostadt, the German “auto city” that celebrates the achievement of Europe’s largest automaker, Volkswagen AG.

Until it opened nearly a decade ago, Wolfsburg, less than a two hours' drive from Berlin, wasn’t much of a tourist destination, unless you liked gritty company towns. But these days, many folks are watching what Volkswagen is up to, especially the competition.

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With nine brands, soon to become 10 with the planned 2011 takeover of Porsche, VW has set an aggressive goal of surpassing the unexpectedly troubled global leader, Toyota Motor Co. To get there, the “People’s Car” company will need to address the one big obstacle in its path: the U.S. market.

But with a new American factory set to open in 2011, and a planned successor to the Beetle that is being kept tightly under wraps and generating buzz, Volkwagen has a shot at that ambitious target.

It wasn’t always that way. Barely four years after the defeat of Nazi Germany, the first two Volkswagen Beetles reached the States. Within a decade, Volkswagen was the largest import brand in America. The little Beetle and the van that shared its platform became a symbol of the country’s counterculture in the 1960s, with sales surging to more than 400,000 units annually.

In the '70s, VW opened the first foreign-owned assembly line and began work on a second “transplant.” But the Beetle’s replacement — the small, fuel-efficient Rabbit — ran into a variety of problems. The automaker scuttled the second plant and then closed the first in Westmoreland, Pa. Despite its best efforts, sales steadily declined and by the early 1990s, VW gave serious thought to pulling out of the States entirely.

Then-CEO Ferdinand Piech, grandson of Volkswagen founder Ferdinand Porsche, decided to hang on, launching an array of new products backed by a series of quirky marketing campaigns. It seemed to work for a while. By the dawn of the new millennium, Volkswagen of America was setting new sales records.

But quality snags caught up to the company. Then exchange rates turned upside down, putting a severe burden on products like the Golf, the renamed and updated version of the Rabbit. European-made Volkswagens cost $3,000 to $4,000 more than American-made versions due to the lopsided exchange rate, said a frustrated Stefan Jacoby, chief executive of Volkswagen of America.

In years past, the German maker might have simply used that as an excuse to ignore the needs of the American market.

Not this time.

Despite the collapse of sales in the U.S., “The American market is crucial for us and Volkswagen is ready to make a difference in the market,” said Joachim Heizmann, the board member for Volkswagen overseeing production.

With Wolfsburg’s blessing, Jacoby has laid out an aggressive, some would say impossible, plan not only to stabilize U.S. sales but to more than double them, to 800,000, by 2018. To achieve that admittedly difficult target, he has convinced top management to sidestep the exchange rate issue by setting up a new American factory, this time in Chattanooga, Tenn., which will open in 2011.

The plant will produce, among other things, a new midsize sedan designed specifically for the American market. And VW is readying another model that it hopes will connect with U.S. consumers, an all-new version of the Beetle which will replace the current, slow-selling model.

“The Beetle successor will be a halo car that sells in large numbers,” Jacoby said during an interview at Autostadt this month.

VW has kept a tight veil over the program. Reports in the well-connected German media suggest the new car will be a markedly different offering than the current Beetle and will be based off an entirely new platform to be shared by a larger family of small Volkswagen offerings.

The new plant should help narrow the cost gap, but there are other issues, cautions analyst Joe Phillippi, of AutoTrends Consulting. For one thing, VW has to overcome concerns about quality. The latest studies by J.D. Power and Associates suggest Volkswagen's defect count is on the decline. And to assuage reluctant buyers, Jacoby approved a program providing free maintenance for buyers of new vehicles.

It is beginning to pay off. Brand loyalty, which plunged to just 29 percent mid-decade, is up to 40 percent, according to the VW executive. But that’s still well behind the 50 percent loyalty for top-tier brands, such as Toyota. (The figure refers to the percentage of owners who plan to buy the same brand again.)

Meanwhile, VW is gaining significant ground in key emerging markets. Its Shanghai-based operation has just sold its 5 millionth vehicle in China, where it remains locked in a battle for supremacy with General Motors.

And so, even while global auto sales remain in a funk, VW gained 1.8 points of share during the last year worldwide and is approaching the 12 percent mark, slightly behind Toyota and GM. With Toyota running into a variety of problems, “it’s not unreachable” for the German maker to become the global king-of-the-hill in the next year or two, contends Christian Klingler, the VWAG board member overseeing marketing and sales.

And even if Toyota is able to resolve its near-term problems, Klingler says that, “By 2018, we have a clear goal to become No. 1 in the world.”

VW’s repeated setbacks in the U.S. market are a reminder that even the most well-founded plans can fall through.

But based on the company’s steady performance, in recent years, analysts like Phillippi say that of all the top-tier makers, VW is clearly one of the best-positioned to achieve its goals.